As a business owner, you need to think more about whether to buy or lease than the average driver. Of course, all standard questions work. But what are the tax benefits of buying a car and buying a car?
Is it better to lease or buy a business vehicle?
Start by deciding whether a purchase or lease makes the most sense for your business. Ultimately, purchasing or leasing a vehicle is a huge expense for your business. Look at the issue from every angle before committing.
- How much to drive: Lease agreements typically limit the number of miles a car can drive to 12,000 or 15,000 miles per year. If you exceed that limit, you could get a penalty of 10-30 cents per mile. If you drive a lot for your business, the purchase may be better.
- You put in the car you wear: A lease agreement requires that you keep your vehicle in good condition. If your vehicle is under excessive wear, there may be additional charges. If the industry beats the car, consider buying it.
- Permanent monthly payments: If you lease a car one after another continuously, you will always receive monthly car payments. However, when you buy a vehicle, you will ultimately own it entirely.
The advantage is that the lease provides access to the latest car models with the latest technology features. With leases, you can access new cars every three years. Additionally, lease payments are generally cheaper than traditional car loans, so you may be able to afford a high-end car.
Business Vehicle Tax Credit
If you use your vehicle for business purposes, the IRS offers two options to deduct related costs. You can use what is called the standard mileage rate deduction or use the actual cost deduction.
You can exchange it for a standard cost for each year of your purchased vehicle. However, you must remain the first choice at the time of lease.
Mileage deduction
A standard mileage approach allows you to claim miles promoted for your business in federal taxes.
The IRS announces the standard mileage rates that can be used to calculate the deductible costs of driving a car for business purposes each year.
How much can I amortize on a leased vehicle? The 2025 rate is 70 cents per mile for business purposes. This means that if you drive 15,000 miles for your business, you can deduct a total of $10,500.
Sales tax
State and local sales taxes can be deducted whether you purchase or lease your vehicle. The way your business calculates it will be different. Sales tax is paid in advance on the purchase, in monthly leases.
If you choose to itemize your deduction, you can deduct sales tax rather than income tax. Your business needs to choose between.
Like other deductions, there is a limit to the amount you can claim. For 2018-2025, that amount is $10,000.
Lease payment
You can use the actual cost deduction on your federal tax return to deduct the costs of your monthly lease payment.
The specific amount of lease payments you can deduct will vary depending on how much you drive your car specifically for your business. For example, imagine your monthly lease payment is $400 and you’re spending 50% of your business time. You can deduct $200 per month as an expense.
These benefits are only available if you sign on to a standard lease. You cannot claim this federal tax deduction.
Car loan interest
Self-employed people and employers can deduct car loan interest from taxes. You will need to record all business trips, odometer reading and car loan payments to see what interest you pay.
Like any deduction, car loan interest can only be included in taxes if you choose the actual cost deduction.
Depreciation
Only vehicles purchased will be eligible for depreciation deduction. Only if the actual cost deduction is used. The way you determine how much your car depreciates per year is usually a change to your Accelerated Cost Recovery System (MACRS).
Like mileage deductions, depreciation deductions change every year.
For the 2025 tax year, the maximum depreciable depreciation can be deducted is the standard depreciation expense of $12,200. Selecting a special depreciation allowance will cost up to $20,200. It varies greatly based on when the vehicle was used.
Check out Publications 946 by the IRS and learn how as a business owner you can depreciate your vehicle and other property.
Maintenance and business expenses
Actual cost rules also include deductions for other costs on leases or purchased vehicles, including:
- gas
- Oil change.
- Vehicle repairs.
- Purchase tires.
If business-related use requires extensive maintenance or repairs in your vehicle, please record it carefully. In this way, you will know how much you have spent and how much your business can save during the tax season.
Differences in costs between leased and purchased vehicles for businesses
The prepayment and monthly costs for lease a vehicle of the same make, model, or year are often less than when you buy it. These savings can be redirected to other business needs and investments.
However, the lease must end in the end. And your business is left to be fair. By purchasing, you can one day own a vehicle and sell it to get some money back.
Lease costs include early termination costs if the contract must be terminated early and excessive mileage fees must be terminated.
Both options come with interest and other fees. Your choice depends on your business’s cash flow and how you use your business.
Conclusion
Like many aspects of running your business, there is no suitable answer for all sizes as to whether leasing or purchasing has more tax benefits. Before investing in a car for your business, think about it:
- How to use the vehicle.
- Can you afford to pay upfront and long-term costs?
- Potential extra charges.
- The tax benefits of leasing a car and buying a car for business.
You can use the Auto Lease Calculator to see if your lease makes economic sense. Alternatively, you can see the current car loan fees. If your situation is complicated, it is always wise to talk to a tax expert.
